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“The world of finance is at the threshold of major disruption that will affect corporations, bankers, states, and indeed all of us. The transformation of money will fundamentally rewrite how ordinary people live”, says economist Eswar S. Prasad the author of The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance.
According to him, we live in an era where the end of physical currency is drawing near. The very concept or definition of money is changing. Cash is slowly being phased out, while credit cards, mobile payments, and cryptocurrencies are offering even more choices to people and allowing them to spend money.
The shift away from cash is both a consequence and a manifestation of other big changes afoot. No currency, not even the mighty US dollar will be able to withstand the change that will affect the future of cash, he adds.
“The overall impact of this disruption could be beneficial in many ways, potentially democratizing finance and improving the lives of even poorer households by expanding their access to savings and credit products. Savers will be able to choose from a broader array of options while small-scale entrepreneurs secure financing from sources other than banks, which tend to have stringent loan underwriting and collateral requirements. Domestic and international payments will become cheaper and more efficient, benefiting consumers, businesses, and even economic migrants sending remittances back to their home countries. The new technologies could also, however, unleash major risks, including some that might currently not even be on the radar of regulators and that could end up hurting the economically underprivileged. Regulatory agencies will struggle to keep up with the coming rapid changes in financial markets as new and non-traditional financial platforms rise in importance, threatening banks and other existing financial institutions. How governments respond to these developments, especially in how they assess and address the potential benefits and risks of financial innovations, will have a significant impact on the risk/benefit balance,” he adds.
The history of cryptocurrencies can be traced back to the 1980s when an American cryptographer called David Chaum invented digital cash. The idea behind it was to create a cheap and fast system for electronic money transfer without involving a bank to mediate the transaction. This opened new possibilities for people to anonymously send millions of dollars around the world without accountability.
In 2009 an anonymous person called Satoshi Nakamoto created a worldwide payment system called Bitcoin that allowed people to transfer money across borders without interference from banks or governments. On 12th January 2009, an American developer called Harold Thomas Finney received the first bitcoin transaction from its creator Satoshi Nakamoto. Finney went on to describe this experience as, “power into the hands of individuals rather than governments and corporations. The computer can be used as a tool to liberate and protect people, rather than to control them.” However, to this day, no one even had an idea about how big a market this would come to be, and someone unaware of their true worth paid 10,000 Bitcoins just for two Papa John pizzas.
But there was no looking back since then. The word “cryptocurrency” was added to the Merriam-Webster Dictionary in March 2018. Since then more than 16,000 different cryptocurrencies including Bitcoin and Ether have come up in the market today. The global crypto market had about 295 million users by the end of 2021. In the latest report, Crypto.com predicts that the total number of crypto users could reach the ten-digit figure by December 2022.
In June 2021, El Salvador became the first country to accept Bitcoin as legal tender. In August 2021, Cuba passed a resolution to recognize and regulate cryptocurrencies. Elon Musk’s company Tesla not only invested in Bitcoin but also started accepting Bitcoins as payment for their vehicles. Recently PayPal allowed its users to make transactions using currencies like Bitcoin and Ethereum. In October 2020, PayPal announced that its customers will be able to buy, sell, and hold cryptocurrencies in their PayPal accounts. Even some banks are reportedly creating their own infrastructure to enable cryptocurrency transactions between their customers.
However, in September 2021, China declared all cryptocurrency transactions illegal and banned the operation of intermediaries and miners within China.
As more and more people jump on the crypto wagon, there are a lot of discussions all over the world as to whether cryptocurrencies could replace the traditional payment methods like cash, cheque, bank drafts, or credit card. The biggest question in everybody’s mind is whether cryptocurrencies are indeed the future of money?
Cryptocurrencies are a type of digital currency that allows people to make payments directly to each other through an online system.
The qualities of money
Ever since times immemorial, there have been many attributes of money like durability, portability, divisibility, uniformity, limited supply, and acceptability. In the ancient past, there used to be a barter system in which something of equal worth was to be given in exchange to buy a good or service. But in today’s world money has three main characteristics — store of value, unit of account, and medium of exchange.
Store of value:
The basic difference is that while fiat currencies are legal tenders issued by the government or regulatory authorities, cryptocurrencies are not backed up by any public or private entity. For example, every rupee issued by the Reserve bank carries an assurance by the Central bank which assures to pay an equivalent amount to the bearer of the currency note.
Unit of value:
Another important feature of money is to act as a common denominator, to measure the exchange value of all goods and services without any difficulty. The value of all goods and services can be expressed in terms of price and money. Cryptocurrencies have no inherent or intrinsic value; they are simply worth what people are willing to pay for them in the market.
Medium of exchange
Throughout history, commodities or precious metals were offered as a medium of exchange. In a traditional barter system, trade between two parties is possible only if one of them has a commodity that another party desires, and vice versa. Paper money has purchasing power that allows people to buy products and services without having to trade products as in the case of the barter system. However, cryptocurrencies are not widely accepted as a means of payment. Cryptocurrencies are not cash or a legal tender and are not backed by a government or other legal entity. Hence people are not bound to accept them as a form of payment.
Berkshire Hathaway CEO and legendary investor Warren Buffett did not mince words when he said, “If you … owned all of the bitcoin in the world and you offered it to me for $25, I wouldn’t take it… Because what would I do with it? I’ll have to sell it back to you one way or another. It isn’t going to do anything.”
Warren’s right-hand man and 98-year-old billionaire investor Charlie Munger used even more harsh words when he called the digital currency “rat poison”
“I certainly didn’t invest in crypto. I’m proud of the fact I’ve avoided it. It’s like a venereal disease or something. I just regard it as beneath contempt,” Munger said during the annual meeting of the publisher Daily Journal Corp.
Intriguingly around 13% of all Bitcoins are held by around 100 individual investors or “crypto whales” who keep manipulating the alternate monetary system to eat the small fish. According to BitInfoCharts, four bitcoin wallets owned 3.49% of all the bitcoin in circulation in May 2022, and the top 100 wallets held around 15.36% of all bitcoin.
The anonymous nature of cryptocurrency transactions makes them ideally suited for illegal activities. The market regulators are particularly worried about the misuse of cryptocurrencies for money laundering, terror financing and tax evasion.
Cryptocurrencies have opened many new unexplored possibilities for illegal activities like money laundering, fraud, drug trafficking, human trafficking, child exploitation, dark marketplace trading, cybercrime and terror funding.